"How many times have you placed your stop at a key Fibonacci retracement target and gotten hit by the locals and stopped out? With everyone using Fibonacci numbers, you have to be one step ahead to win the race. Here are some tips. Fibonacci numbers work because crowds--including crowds of numbers--are dynamic systems that conform to mathematical laws. If you have ever been to the Museum of Science and Industry in Chicago, you may have seen the machine there that sorts balls randomly into eight slots and at the end of the run, the balls form a bell curve. Likewise, the Fibonacci numbers of .362, .500, .618, 1.618 and 2.168 etc., create important, predictable price value--even in the wild chaos of 400,000 T-Bond contracts traded daily in the pits.
A bull market is likely to have a minimum retracement of .236 or .382, and if you are looking to get in an entry from the top that will get you filled, then a safe, tight stop may be the only slippage factor below the 38% retracement. Knowing Elliott Wave principles can also aid you in choosing the proper stop, and we would recommend the basic Elliott Wave books to guide you in that area. On double tops and bottoms, locals will usually pick off a stop 1 or 2 ticks above or below the market, but a real breakout or breakdown will be occurring if the market goes through slippage.
Bear markets are likely to retrace 62% - 66% so stops need to go above the 70% level usually.
When markets have very large range days that you see once in 6 months or a year, these third waves are often followed by a congestion triangle pattern in which the first part of the retracement is 78% of the recent move. In these cases, if you are looking to rebuy or sell, watch for that level and you will have to place stops above the 85% retracement level.
While each market has its own behavior patterns, the following slippage numbers can keep you out of trouble and prevent the locals from gunning you down.
The following list shows the slippage factor for the most actively traded commodities. Remember you need to use stops above these slippage factors and if conditions are more volatile than usual, then increase the slippage factor by 33%.
